The relationship between TMT Nationality
Diversity and Firm Performance
Valentijn Haalebos
6073379
MSc Thesis Business Studies
University of Amsterdam
ABSTRACT
Extant research corroborates that there is a link between TMT diversity and firm performance (Nielsen & Nielson, 2013), yet results in past research are not entirely aligned, suggesting the need to reassess the sign of such association. Despite the proof of a linear relationship between the two constructs, there is substantial evidence in the literature in favour of a non-linear relationship (Nielsen, 2010; Schmid and Dauth, 2014).
Diversity, in general, is characterized to contribute to the functioning of a group or team (Knight et. al, 1999). The literature assumes that diversity results in a richer variety of ideas, creativity, and innovation, hereby improving group performance (Cox, 1993). Built on the fundamentals of upper echelon theory together with insights from group process theory we attempted to examine
the likelihood of a curvilinear relationship between TMT nationality diversity and firm performance.
Our findings did not provide any significant evidence for a curvilinear relationship (H1). Nor did it for a linear relationship. Furthermore the modifying effect of firm internationalization (H2), home region focus (H3), and regional policy integration (H4) on the core relationship between TMT nationality diversity and firm performance did not show any significance.
Table of Content
INTRODUCTION... 5
LITERATURE REVIEW ... 8
Upper echelons theory Globalization patterns within TMTs TMT nationality diversity and firm performance THEORETICAL FRAMEWORK ... 14
TMT nationality diversity and firm performance The moderating role of firm internationalization The moderating role of home region focus The moderating role of regional policy integration METHODS ... 20
Data and Measures Dependent variable...21
Independent variable...22
Moderating variables...22
Control variables...23
Data analysis and Results DISCUSSION ... 33
Academic relevance Managerial implications Limitations and suggestions for future research CONCLUSION ... 36
ACKNOWLEDGEMENTS ... 37
INTRODUCTION
Garrett (2000) defines globalization as ‘‘the international integration of markets in goods, services, and capital’’ (p. 941). Despite current technological innovation lowering the cost of moving goods and information around the world, the liberalization of foreign economic policy, and growing international economic activity, according to Ghemawat and Pisani (2013) ‘‘it is an ill-fated misconception to picture globalization as an already advanced, inevitably rapid, and geographically homogenous path to perfect cross-border integration.’’ In reality most of today’s foreign economic activity is still dominated by a few large multinational enterprises (MNEs) (Ghemawat & Pisani, 2013). According to Heijltjes, Olie, and Glunk (2003) the globalization pattern we witness across firms is expected to be reflected in the top management team as well. One leading example of a large MNE is Royal Dutch Shell. This year Royal Dutch Shell leads the ranking of the Fortune global 500. The Fortune Global 500 lists the 500 largest MNEs in the world. With approximate revenues of over 481 billion dollars and a workforce of more than 87,000 employees, Royal Dutch Shell is positioned as the largest global MNE for the second consecutive year (Royal Dutch Shell, 2013). Their ‘executive committee’, for purposes of consistency here referred to as the top management team (TMT), consists of eight members who together represent a total of five nationalities (Royal Dutch Shell, 2013). This highly internationalized firm shares a highly nationally diverse TMT. Based on the principle of requisite variety (Ashby, 1956; Morgan, 1986), this congruency between TMT nationality diversity and firm complexity is not surprising. The law of requisite variety explains that a firm should be aligned to its environment. Thus a firm with high geographically dispersed subsidiaries should coincide with a TMT that reflects this environmental complexity in the form of a nationally diverse TMT (Heijltjes et al., 2003). A nationally diverse TMT ‘‘may help decision makers
reduce the complexity of available information by filtering the abundance of stimuli through selective perceptions and interpretations’’ (Nielsen, 2010: 191). Yet does the performance of the firm improve as a result of a highly nationally diverse TMT?
According to Watson, Kumar, and Michaelsen (1993) nationality diversity contributes to a better performing firm. Nationality diversity (within the TMT) can enhance the comprehensiveness and quality of strategic decision making which involves a certain degree of complexity, uncertainty, and lack of routine.
Nielsen and Nielsen (2013) also find that TMT nationality diversity is positively related to firm performance. Yet in Nielsen’s earlier work (2010) the results obtained suggest that the relationship between TMT nationality diversity and firm performance is one that is of a non-linear nature. TMT nationality diversity can contribute to the foreign expansion process of a firm, yet a highly nationally diverse TMT may for instance over internationalize a firm, that could result in a diminishing performance. Even more so Schmid and Dauth (2014) provide additional evidence suggesting the likelihood for a non-linear relationship. Focusing on the appointment of an international TMT member and its reaction on the stock market, they observe a significant inverted U-shaped curve indicating that the relationship between the internationalization of a top manager and firm performance is non-linear. In addition group process theory (Shaw, 1981) forms a sound exemplar of the cons of too much diversity within a group that can have negative effects on the group outcome.
The academic literature on TMT composition is quite established. Despite the current era of globalization, research on TMT nationality diversity and its relation to firm performance is relatively less investigated. Accordingly, this study precisely focuses on the direct relationship between TMT nationality diversity and firm performance and hypothesizes that this exact
relationship is one that is non-linear (H1). Furthermore the modifying effect of firm internationalization (H2), home region focus (H3), and regional policy integration (H4) are tested. Results show that the hypothesized curvilinear relationship between TMT nationality diversity and firm performance is not significant nor is the linear term. Furthermore the modifying effects of all three moderators are not significant. Despite the theoretical evidence, the empirical evidence did not confirm our theory development and could not confirm any significant relationship between TMT nationality diversity and firm performance. Thus contributing to the extant literature on TMT nationality diversity our findings underline the divergence of results in past research outcomes on the type of association between TMT diversity and performance.
The thesis is organized as follows. First the extant literature is reviewed integrating and summarizing what is known in the field of TMT research. In this section the theoretical foundation is presented of the relationship between TMT demographic diversity and firm performance; upper echelons theory. Then we look at the composition of the TMT and focus on the globalization patterns within TMTs and introduce the relationship between TMT nationality diversity and firm performance. After the literature review we develop our theory and present our conceptual model. Finally in the method section we describe the data and measures and elaborate on the statistical analysis and present the results after which we close with a discussion and conclusion.
LITERATURE REVIEW
‘Top management team’ (TMT) is a term that is used to refer to an organisation’s executive directors (Johnson, Scholes, & Whittington, 2008) or in Hambrick and Mason’s (1984) terminology, the TMT resembles the ‘upper echelon’ in a firm.
A great deal of the extant literature on top management teams (TMTs) is concerned with the ‘composition’ of the upper echelons (e.g. Amason, Shrader, & Tompson, 2006; Carpenter, Geletkanycz, & Sanders, 2004; Nielsen & Nielsen, 2013). Various researchers tackle the composition problem by addressing TMT demographic diversity. According to the Oxford English Dictionary ‘diversity’ is defined as ‘‘the condition or quality of being diverse, different, or varied’’ (Diversity, 2014). Diversity, in general, is characterized to contribute to the functioning of a group or team (Knight et. al, 1999). The literature assumes that diversity results in a richer variety of ideas, creativity, and innovation, hereby improving group performance (Cox, 1993). Demographic diversity in this case refers to the demographics of the TMT. Examples of TMT demographic attributes include size, age, tenure, experience, education and nationality etc. (Nielsen & Nielsen, 2013). Among others, Greve, Nielsen, and Ruigrok (2009) and Nielsen (2009) examine different level factors that influence TMT demographic diversity. They argue that the level of TMT demographic diversity is dependent on the organization’s international strategy and furthermore the lack of TMT demographic diversity is a result of the ‘Attraction-Selection-Attrition’ tendencies of a firm. Mannix and Neale confirm this claim arguing that ‘‘similarity on attributes such as attitudes, values, and beliefs will facilitate interpersonal attraction and liking’’ (2005: 31).
Various individual demographic attributes of TMT members are hypothesized to relate to a diverse range of independent variables including firm internationalization (Herrmann & Datta,
2005), number of foreign entries (Nielsen, 2010), choice of foreign entry mode (Nielsen & Nielsen, 2011), stock market reaction (Schmid & Dauth, 2014), and firm performance (Nielsen & Nielsen, 2013). Relatively to the relationship between TMT demographic diversity and firm performance past research is reporting mixed results, including positive, negative, a combination of both positive and negative as well as non-significant effects on firm performance (Carpenter, Geletkanycz, & Sanders, 2004; Finkelstein, Hambrick, & Cannella, 2009; Nielsen, 2009).
In order to understand the rationale behind a linkage between TMT demographic diversity and firm performance in the first place, it is key to introduce the foundation of this relationship: upper echelons theory (Hambrick & Mason, 1984). Subsequently, this literature review is addressing the current globalization patterns within TMTs. Finally, the focus is put on a particular TMT demographic; TMT nationality, and its very relationship with firm performance.
Upper echelons theory
Upper echelons theory describes that ‘‘executives’ experiences, values, and personalities greatly influence their interpretations of the (strategic) situations they face and, in turn, affect their choices.’’ (Hambrick, 2007: 334).
Upper echelons theory is built on the premise of bounded rationality; the study of how people make decisions in an uncertain world (Simon, 1972).
In its original form, upper echelons theory introduced two subordinate ideas. The first one addressed the fact that it is better to focus on the ‘TMT’ in its entirety in explaining firm performance, as opposed to solely focus on an individual executive, for example the Chief Executive Officer (CEO). ‘‘Leadership of a complex organization is a shared activity, and the collective cognitions, capabilities, and interactions of the entire TMT enter into strategic
behaviours’’ (Hambrick, 2007: 334). Thus, since the TMT as a whole brings about firm actions, we can argue that firm performance is, at least to a certain degree, dependent on TMT composition and thus TMT demographic diversity.
Second, Hambrick (2007) underlined the validity of using various (demographic) attributes of TMT members as predictors of the cognitive processes of executives. Though the ‘black box problem’, the inability to gain access to and grasp the psychological and social processes of TMTs is not solved, using a comprehensive set of TMT demographics softens this obstacle (Hambrick, 2007).
Thus, upper echelons theory forms the theoretical foundation of the relationship between TMT demographic diversity and firm performance. In other words we now have a theory to understand the principle explaining why TMTs act the way they do and that those actions have effect on the performance of the firm. To put this theory in perspective the next section will shed light on why TMTs look the way they do. Key for this understanding is that of the law of requisite variety (Ashby, 1956; Morgan, 1986). Relative to the focus of this research and in an effort to further illustrate the relationship between TMT demographic diversity and firm performance we look at the composition of the TMT and focus on the globalization patterns within TMTs.
Globalization patterns within TMTs
Multinational enterprises are becoming more internationalized in terms of the geographic scope of their foreign direct investments and the number of nationalities held by personnel etc. (Heilltjes et al., 2003). Interestingly, based on a sample of both Dutch and Swedish companies, Heijltjes et al. (2003) observe that the level of internationalization of TMTs falls short compared to the internationalization of the firm.
In their research Heijltjes et al. (2003) corroborate that the level of TMT nationality diversity1 is associated with geographic diversification, the amount of foreign sales, the number of subsidiaries held abroad and that even firm size is linked to TMT nationality diversity. The principle explaining this relationship is that of the ‘law of requisite variety’ (Ashby, 1956; Morgan, 1986). In this case the law of requisite variety means that a firm should be aligned to its environment. For instance a firm with high geographically dispersed subsidiaries should coincide with a TMT that reflects this environmental complexity in the form of a nationally diverse TMT (Heijltjes et al., 2003). A nationally diverse TMT ‘‘may help decision makers reduce the complexity of available information by filtering the abundance of stimuli through selective perceptions and interpretations’’ (Nielsen, 2010: 191).
Moreover they find that a high percentage of foreign managers at a particular point in time should hold some explanatory power as to the level of nationality diversity of the TMT in the future, as those foreign nationals will stand a higher chance of being promoted into the upper echelon of the firm.
In their discussion Heijltjes et al. also state that the ownership of a firm, more specifically the internationalization of ownership, could also be related to the level of nationality diversity of TMTs, ‘‘companies listed on international stock exchanges will be confronted with a strong monitoring of their actions. In order to attract international investors, a trustworthy and international image is important’’ (2003: 93).
In addition, Heijltjes et al. (2003) also suggest that the particular type of multinational corporation might affect the TMT composition in terms of attracting foreign nationals. The global orientation of the firm might explain incremental variance as for the level of nationality
1 Heijltjes et. al (2003) operationalize TMT internationalization by measuring TMT nationality. For purposes of consistency we therefore use the term TMT nationality diversity.
diversity of TMT’s. In other words the level of nationality diversity of the TMT is dependent on the degree to which the firm appreciates cultural diversity. A firm that perceives itself to be domestic will show less nationality diversity than a firm that perceives itself to be international (Heijltjes et al., 2003).
In an attempt to reexamine the nature of the relationship between TMT demographic diversity and firm performance, Nielsen and Nielsen (2013) measure the direct relationship between ‘TMT nationality diversity’ and firm performance. The following section precisely reviews all published works on this subject.
TMT nationality diversity and firm performance
According to Nielsen and Nielsen (2013) ‘nationality’ is embedded in an institutional environment, to which an individual is exposed while growing up. The ‘formal’ rules and regulations combined with the informal ‘norms and values’ together influence how a person deals with information, concerning the interpretation and processing of information, and how a person behaves, concerning the strategic action taken in response to opportunities and threats (Hofstede, 1984). The literature brings these collectively held patterns of thinking, feeling, and acting together in what is known as national culture (Hofstede, 1984). These patterns are entrenched inside a person’s mind and are not believed to change significantly over time (Hofstede & Hofstede, 2005).
Nielsen and Nielsen (2013) measure the direct relationship between TMT nationality diversity and firm performance. Besides measuring TMT nationality diversity, four alternative attributes of TMT demographic diversity are taken into account: international experience, industry experience, functional diversity, and educational diversity. They find that ‘TMT nationality
diversity’ has a significant positive relationship with firm performance. This relationship is positively moderated by team tenure (team level), internationalization (firm level), and industry munificence (industry level).
Nielsen and Nielsen’s (2013) research outcome deviates from Nielsen’s (2010) earlier research. In her prior work she failed to find a direct significant correlation between TMT nationality diversity and firm performance2. Her findings suggest that firms can benefit from increasing TMT nationality diversity while it can contribute to the internationalization process of the firm. Furthermore Nielsen’s (2010) findings indicate that the relationship between TMT nationality diversity and firm performance is non-linear. Increasing TMT nationality diversity can help a firm to (further) internationalize because the international ‘capability’ of the TMT is strengthened. The realized international expansion in turn improves performance. Yet, a highly nationally diverse TMT may over-internationalize the firm. In that case the TMTs internationalization capacity of the firm is surpassed and the costs of firm internationalization outweigh the benefits, thereby diminishing firm performance. On a similar note, Schmid and Dauth (2014) argues that TMT internationalization could have both positive as well as negative effects on performance. Schmid and Dauth (2014) test the presumption that the appointment of an international top manager can improve the corporate monitoring and transparency standards (Heijltjes et al., 2003; Oxelheim & Randøy, 2003). Schmid and Dauth (2014) use a multi-dimensional measure to calculate the internationalization of an individual top manager. This measure incorporates ‘nationality’ besides accounting for international education, international work experience, and international linkages. Note that Schmid and Dauth (2014) test their presumption by measuring TMT internationalization at an individual level. Based on a data
2 In Nielsen’s earlier work (2010), TMT nationality diversity is measured jointly with TMT international experience as part of a composite index measuring TMT internationalization.
sample consisting of German MNE’s they investigate whether the appointment of an international top manager affects the stock price of an MNE. They observe a significant inverted U-shaped curve indicating that the relationship between the internationalization of a top manager and firm performance is non-linear.
Thus even though extant literature on the specific relation is limited, prior research suggests a non-linear relationship between TMT nationality diversity and firm performance (Nielsen, 2010; Schmid & Dauth, 2014). Besides the empirical limitations of these findings it is important to note that Schmid and Dauth (2014) are neglecting the relevant ‘focus’ on the TMT in its entirety (Hambrick, 2007). In that sense ‘TMT nationality diversity’, a sub-dimension of TMT internationalization (Nielsen, 2010), is a valid measure in line with the subordinate idea of upper echelons theory.
Till this date Nielsen and Nielsen (2013) are the only researchers that have specifically measured the direct relationship between TMT nationality diversity and firm performance. In contrast to Nielsen and Nielsen’s (2013) findings, extant literature clearly suggests the likelihood of a non-linear relationship. In an attempt to re-examine the nature of this relationship we adopt Nielsen and Nielsen’s (2013) team level measure of TMT nationality diversity and theoretically frame its relationship with firm performance.
THEORETICAL FRAMEWORK
We started our theory development by first examining the nature of the relationship between TMT nationality diversity and firm performance, followed by analyzing the modifying effects of firm internationalization, home region focus, and regional policy integration.
TMT nationality diversity and firm performance
It is evident that there is a link between TMT diversity and firm performance (Nielsen & Nielson, 2013), yet results in past research are not entirely aligned, suggesting the need to reassess the sign of such association. Nielsen & Nielsen (2013) decompose the construct of TMT diversity and measure the direct relationship between TMT nationality diversity and firm performance. Despite the proof of a linear relationship between the two constructs, there is substantial evidence in the literature in favour of a non-linear relationship (Nielsen, 2010; Schmid and Dauth, 2014). Besides the positive contributions diversity can bring about to a firm, the negative associations of diversity can be explained by group process theory (Shaw, 1981). Group process theory illustrates ‘‘how group interpersonal processes work to influence various group and/or organizational outcomes such as firm performance’’ (Knight et. al, 1999: 445). Pearce and Revlin (1987) state that ‘homogeneity’ may lead to greater satisfaction, less conflict, and better communication within groups. Moreover, Mannix and Neale (2005) elaborate on the ‘pessimistic’ view on group diversity that creates ‘‘social divisions that, in turn, create poor social integration and cohesion, resulting in negative outcomes for the group’’ (p. 34).
It is evident that diversity can bring about both advantages and disadvantages to a group. Building on extant research, we suggest that there exists a point of inflection after which disadvantages become greater than advantages and thus increasing nationality diversity actually dampens firm performance. This point of inflection can be explained by the logic behind the S-shaped curve. Ceteris paribus, increasing TMT nationality diversity can help a firm to expand internationally because the international ‘capability’ of the TMT is strengthened. The realized international expansion in turn improves performance. To be more precise, this international capability of the TMT lowers the initial liability of foreignness (Zaheer & Mozakowski, 1997). A
nationally diverse TMT can reduce the unfamiliarity with the respective institutional environment in which it operates and can avoid the potential discrimination against the firm. Furthermore learning costs (Doz, Santos, & Williamson, 2001) associated with getting to know the nationality and culture of the new foreign countries are greatly reduced. Lastly adaptation costs, i.e. cultural adaptation, are lowered. At a certain threshold level of TMT nationality diversity firm performance starts to diminish. At this point the TMTs internationalization capacity of the firm is surpassed and the costs of further international expansion outweigh the benefits. Based on this assumption we come to the following hypothesis:
Hypothesis 1. The relationship between TMT nationality diversity and firm performance is curvilinear, with the slope positive at low levels of TMT nationality diversity and negative at high levels of TMT nationality diversity.
The moderating role of firm internationalization
Firm internationalization refers to the international expansion of a firm beyond the current borders of the firm’s geographical presence (Ruigrok et al., 2007). For our research purposes we adopt a commonly used interpretation of firm internationalization by looking at the geographic dispersion of sales, making a distinction between foreign and local sales (Nielsen & Nielsen, 2013; Ruigrok et al., 2007).
The ‘law of requisite variety’ (Ashby, 1956; Morgan, 1986), suggests that a firm must match their TMT composition to corporate strategy and the industry environment (Keck & Tushman, 1993; Szilagyi & Schweiger, 1984). The level of complexity of a strategic decision is associated with a certain required level of information processing. Greater TMT nationality diversity can
improve this process by enabling a firm to better adapt and respond to changes, while it enables better access to information. Furthermore higher quality decisions are made as a result of a diverse range of ‘institutionally embedded’ experiences (Nielsen & Nielsen, 2013). Hence, complex environments represent the most suitable settings where to reap the fruits of highly nationally diverse TMTs. Greater levels of firm internationalization are crucially associated to increased organizational complexity. As a matter of fact, firm internationalization gives management greater challenges with respect to governance, coordination, and information-processing etc. (Sanders & Carpenter, 1998). Thus, given the hypothesized curvilinear relationship between TMT nationality diversity and firm performance, we hypothesize that:
Hypothesis 2. Ceteris paribus, firm's level of internationalization positively moderates the relationship between TMT nationality diversity and firm performance.
The moderating role of home region focus
Home region focus (HRF) refers to a company’s geographic scope of activity (Banalieva, Santoro, and Jiang, 2012). Rugman and Verbeke (2004) speak of the breadth and depth of market coverage. They focus on the triad, which is ‘‘home to most innovations in industry, and includes the largest markets in the world for most new products’’ (p. 4), and consists of North America, Europe, and Asia. Rugman and Verbeke (2004) define HRF as having at least 50% of sales in the home region of the firm’s triad.
In reality most firms pursue a regional strategy meaning that, as far as sales are concerned, they are mostly concentrated in the home region (Banalieva et. al, 2012). Looking at the other end of the continuum firms pursue a global strategy when they have at least 20% of sales in each of the
triad regions, but less than 50% in any of the three regions alone. Results show that only few companies can be treated as true global players (Rugman & Verbeke, 2004).
Nationally diverse TMTs can leverage their experiences and knowledge gained from their background to lower the cost of liability of foreignness to help a firm expanding abroad (Hymer, 1976). In case of high HRF, this capability is made redundant while a firm with a regional strategy does not, by definition, seek international expansion, at least not beyond the home region of the firm.
Nielsen and Nielsen (2010b) point out that TMT human capital (knowledge, skills, and experiences) is directly related to their ability to gain access to resources. By gaining access to resources the TMT is able to formulate effective strategies (Nielsen & Nielsen, 2010b). Given that a firm pursues a regional strategy (high HRF), we expect that the nationality diversity of the TMT will negatively affect its ability to access resources in the home region and that it will reinforce a certain degree of liability of foreignness. A highly diversified TMT may encounter that it lacks cultural and national understanding, adaptation costs could increase, and even more extreme, discrimination against the firm might be reinforced. Even though according to Zaheer and Mozakowski (1997) this relative disadvantage of unfamiliarity will diminish over time, the costs associated with the liability of foreignness still impact firm performance (Lu & Beamish, 2001). Based on this argumentation, we hypothesize:
Hypothesis 3. Ceteris paribus, firm's home region focus negatively moderates the relationship between TMT nationality diversity and firm performance.
The moderating role of regional policy integration
Regional policy integration is realized by the regional trade agreements (RTAs). These RTAs, generally known as trade institutions, are mainly concerned with liberalizing and increasing the flow of overseas commerce (Mansfield & Reinhardt, 2008). Trade institutions are designed to stabilize and reduce volatility in trade policy and trade flows. First and foremost trade institutions restricts members to introduce new trade barriers. Second, trade institutions foster policy transparency and convergence in expectations, standards, and policy instruments. Lastly trade institutions shift the structure of markets in ways that promote greater stability in commercial transactions over time.
Despite the benefits that RTAs can bring about to the member states involved, such benefits are dependent on the level of integration of the RTA. The Asia-Pacific Economic Cooperation (APEC) is an example of a less integrated pre-free trade agreement. Within the APEC various states are reluctant to cooperate with one another for reasons stemming from differences in national income, nationalism, and sheer distrust (Schiff & Winters, 2003). Furthermore the APEC has a ‘‘lack of leadership and inability for its RTA members to often reach consensus’’ (Banalieva et. al, 2012: 503).
Moving from a country level to a firm level, a less integrated RTA increases the complexity of the institutional environment while it diminishes the harmony of institutional contexts. This requires member states’ firms to adapt to the context by using ‘‘more elaborate routines and coordinating mechanisms’’ (Banalieva et. al, 2012: 503). During this process of adaptation a nationally diverse TMT could greatly benefit this process by granting the firm access to a unique and valued source of knowledge, resources, experience, and extensive business network (Hymer,
1976). This way the potential pitfall of less integrated RTAs can be by-passed and the benefits can be fully enjoyed by the focal firm. Thus:
Hypothesis 4. Ceteris paribus, policy integration of MNE's home region positively moderates the relationship between TMT nationality diversity and firm performance.
The 4 hypotheses are visualized in the conceptual framework as presented in Figure 1. Figure 1: Conceptual framework and hypotheses
METHODS
Data and MeasuresThe sample of this research consisted of the largest 500 MNEs in the world, as ranked in the Fortune Global 500 2013 list. These 500 corporations were ranked based on their total revenue as published in the financial data by the end of the fiscal year ended on or before 31 March, 2013.
The focus on the ‘global’ 500 MNEs filled in an empirical gap in prior research that was limited to a particular geographic location. The works of Nielsen and Nielsen (2010a; 2010b), and Nielsen and Nielsen (2013) is based on samples that consist of solely Swiss listed companies.
For every corporation we acquired the annual report for 2012 from the corporate website and, where possible, additional data was obtained from the Orbis database. Table 1 presents an overview of the geographic distribution of the home countries of the Fortune Global 500 firms.
Dependent variable
The dependent variable ‘firm performance’ was operationalized in two ways. First by solely measuring the return on assets (ROA) at the end of the calendar year 2012, second by taking the average ROA over the period 2008-2012 in order to account for potential single year outliers (Nielsen & Nielsen, 2013). Since we are re-examining the same relationship as Nielsen and
Table 1 Distribution of firms home country
Country Frequency Percentage
United States 133 26.6 China 84 16.8 Japan 62 12.4 France 31 6.2 Germany 29 5.8 United Kingdom 26 5.2 Korea, Republic of 14 2.8 Switzerland 14 2.8 Netherlands 11 2.2 Canada 9 1.8 Other 87 17.4 Total 500 100
Nielsen (2013) we chose to operationalize the dependent variable in line with their research.
Independent variable
As for the TMT we used the executive team listed in the companies’ annual report. TMT regional diversity was measured by using the Blau index (Blau, 1977) applying the following formula: B = 1 – [(p/k)^2], where p is the amount of TMT members of a particular region, and k the total amount of TMT members. Measured on a scale from 0 (perfect homogeneity) to 1 (perfect heterogeneity). Note that this operationalization is a computation measuring regional diversity rather than nationality diversity and is therefore named ‘TMT regional diversity’. In order to also account for diversity in nationality of the TMT we operationalized a second measure, ‘TMT nationality diversity’, in the following manner: total number of nationalities represented / total number of members. Third, as an additional measure of TMT nationality diversity, we chose to account for the level of internationalization of the TMT. ‘TMT internationalization’ was operationalized as follows: total number of international members / total number of members.
Moderating variables
The moderator ‘firm internationalization’ was operationalized by calculating the foreign sales as a percentage of total sales. In contrast to Nielsen and Nielsen (2013), we neglected taking the measure foreign assets as a percentage of total assets, while this ratio is highly correlated to the sales ratio mentioned above. Furthermore Nielsen & Nielsen’s (2013) third measure for firm internationalization, geographic dispersion of foreign sales, was disregarded, as it is somewhat
controversial to take the average of a combination of ratio’s and a dummy variable (Field, 2009). ‘Home region focus’ (HRF) was measured by using the same operationalization as Rugman and Verbeke (2004). Thus, we considered regional sales (including domestic sales) as a percentage of total turnover. Firms that have 50% or more of their sales in their home region are considered home region focused. This percentage coincides with the cut-off point of Rugman and Verbeke (2004). We constructed a dummy that, for each case, took into account whether a firm was home region focused or not. A firm that was not home region focused was considered to have a global focus.
Lastly, the third moderator ‘regional policy integration’ was measured by ‘‘recognizing the gradual progression of policy-coordination with each level of regional trade agreement (RTA)’’ (Banalieva et al., 2012: 507). We took the same operationalization as Banalieva et al. (2012) who break the RTAs down into three levels of integration. Asia-Pacific Economic Cooperation (APEC) was considered the least integrated RTA and is therefore assigned 0. The North American Free Trade Agreement (NAFTA) is assigned 1, and the European Union (EU) is assigned 2 resembling the highest level of policy integration among the countries of the firms’ RTAs.
In order to test the modifying effect of the three moderators, six interactions were created covering both measures of TMT nationality diversity.
Control variables
As control variables we have used the following firm-level measures: First of all firm size by taking the log of firm employees. Firm size is a common control variable used in IB literature when studying performance. Chao & Kumar (2010) argue that larger firms are better capable of
leveraging economies of scale; and so performance could therefore differ between larger and smaller firms. Second, we accounted for the deviation in age between companies. Age of the company is said to be related to performance where it can affect both short- and long-term performance, moreover aged companies might show lower performance levels due to conservative management styles and use of outdated technology (de Jong & van Houten, 2014). Third, we controlled for the industry the firm is active in. The ‘industry’ control variable is operationalized by dividing the firms into three categories; primary, secondary, and tertiary. The primary sector includes all firms active in the natural resources business. The secondary sector is concerned with firms that are mainly producing and/ or manufacturing, and lastly the tertiary sector, which is essentially made up of service oriented firms. For this latter control variable two dummies were created for both the primary and secondary industry. Fourth we controlled for the home region of the firm. For this variable we created three dummies; North America, Western Europe, and Asia.
Data analysis and Results
Table 2 presents the descriptive statistics and correlations of the dependent, independent, control, and moderating variables used in this research. The mean value of the average ROA is 5.27%, which means that over the 5 year period, taking into account 230 firms, on average 5.27% of invested capital is generated into earnings.
Using the Blau index, TMT regional diversity on average is equal to 0.14, which indicates, on a scale from 0 to 1, a rather limited regionally diverse TMT. If we consider the second measure for TMT nationality diversity, taking into account the number of countries represented in the TMT
and the size of the TMT, we find a mean of 0.24. TMT internationalization on average is equal to 0.24, which means that roughly a quarter of TMT members is from abroad.
Firm size, measured as the log of firm employees, has a mean of 4.86, this equals to roughly 73,000 employees. The average company age is 67.94 years. On average a firm is headquartered in a region that covers 25 countries.
As for firm internationalization the fortune global 500 firms show an average of 0.50. This figure indicates that the chosen sample is highly relevant for the purposes of this study. Approximately half of sales stems from the home country, the remaining half of sales is generated outside of the home country.
Table 2. Descriptive statistics and correlations
Variable Mean Std. Dev. 1 2 3 4 5 6 7 8 9
1 Average return on assets (ROA) 5.265 6.004 1
2 TMT regional diversity 0.140 0.232 0.185** 1 3 TMT nationality diversity 0.239 0.172 0.061 0.375** 1 4 TMT internationalization 0.239 0.211 0.078 0.587** 0.686** 1 5 Firm size 4.862 0.496 0.070 0.070 0.075 0.164* 1 6 Company age 67.939 55.682 -0.074 0.106 0.104 0.132* 0.128 1 7 Firm internationalization 0.504 0.298 0.135* 0.328** 0.405** 0.523** 0.269** 0.123 1
8 Home region focus 0.717 0.451 -0.263** -0.335** -0.250** -0.365** -0.163* -0.018 -0.584** 1
9 Regional policy integration 1.150 0.819 -0.029 0.083 0.298** 0.293** 0.135* 0.196** 0.357** -0.167* 1 * p < 0.05; ** p < 0.01
Considering the home region (versus global) orientation of companies surveyed, the HRF averaged to 0.68, corroborating a clear home region focus.
The final moderator regional policy integration has a mean of 1.15. This indicates that on average, measured on a scale from 0-2, the firms are quite integrated in terms of their regional policy. This figure is not surprising as most Fortune Global 500 2013 firms are headquartered in the United States. The US is part of the NAFTA, which was assigned a 1 in the dummy variable. There was no multicollinearity, as all variance inflation factors (VIFs) were well below 10, which is the cut-off point after which values are considered to be critical (Field, 2009).
To analyse the estimated influence of TMT nationality diversity on average ROA we used a hierarchical linear regression model. (Note that we have replicated the regression analysis for the first dependent variable ‘ROA’, yet as for ‘average ROA’, ROA did not show any significant fit for both the linear term as well as the quadric term. Furthermore we have replicated the regression analysis using 4 other operationalizations of firm performance namely: ROS, ROE, EBIT, and Profit. Likewise these measures did not grant a significant linear or quadric term. Even though both ROA and average ROA did not show any significant fit on the linear and/ or the quadric term, for technical purposes we choose to solely present the regression analysis by using the ‘average ROA’. In our opinion average ROA is a more objective measure of firm performance, while it takes into account potential outliers in a certain year of operation.) In the first model the control variables were entered. Subsequently we added the independent variable to investigate the relationship between TMT nationality diversity and firm performance. The results of the hierarchical linear regression are presented in Table 3a (independent variable:
TMT nationality diversity), Table 3b (independent variable: TMT regional diversity), and Table 3c (independent variable: TMT internationalization).
As a preliminary step we ran Model 1 and looked at case wise diagnostics. Case 36 (Pemex) had a residual error of no less than 6.198, thus being a possible influential outlier we removed Pemex from the dataset and continued the analysis.
Model 1 indicates that there was a significant positive relationship between the variable controlling for the industry and firm performance. The relationship between the variable controlling for the home region of the firm and firm performance was only significant for the Asian region. This relationship was significant and negative. The inclusion of the variable controlling for the age of the firm was not significant. Thus company age is not a significant predictor for average ROA. This also accounts for the variable controlling for firm size.
In the second model we added the independent variable TMT nationality diversity. The linear term was positive but not significant. Adding the quadric term in the third model showed a non-significant relationship. The same accounts for both other independent variables ‘TMT regional diversity’ - Table 3b, and ‘TMT internationalization’ - Table 3c, where the quadric term was also not significant. For the first hypothesis our aim was to look for evidence suggesting a curvilinear relation between TMT nationality diversity and firm performance. Based on the non-significant quadric terms we conclude that there is no statistical evidence for a curvilinear relationship between TMT nationality diversity and firm performance. Therefore we reject H1. To test the second hypothesis, in Model 4 the variable firm internationalization was added, subsequently the interaction term between firm internationalization and TMT nationality diversity was added. Consequently TMT nationality diversity remains insignificant as a predictor
for average ROA. Firm internationalization is a insignificant predictor for average ROA. The interaction effect is not significant. Therefore we reject H2.
As for the third hypothesis, in Model 5 the variable HRF was added, subsequently the interaction term between HRF and TMT nationality diversity was added. As a result, congruent to the second hypothesis, TMT nationality diversity remains insignificant. HRF is a significant predictor of average ROA. However the interaction effect is not significant. Therefore we reject H3.
For the fourth hypothesis, in Model 6 the variable regional policy integration was added, subsequently the interaction term between firm internationalization and TMT nationality diversity was added. Consequently TMT nationality diversity remains insignificant as a predictor for average ROA. Regional policy integration is a significant predictor for average ROA. However the interaction effect is not significant. Therefore we reject H4.
Table 3a. Regression results (TMT nationality diversity)
Dependent variable: average ROA Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
(n = 230) (n = 230) (n = 230) (n = 230) (n = 230) (n = 230) Control variables Firm size 1.505 1.484 1.522 1.339 1.324 1.359 Company age -0.011 -0.012 -0.011 -0.012 -0.011 -0.011 Industry Primary industry 5.288** 5.155** 5.116** 4.988** 5.428** 5.089** Secondary industry 3.387** 3.082** 3.152** 2.876** 2.526** 3.184** Region North America 1.516 1.508 1.524 1.772 1.808 -2.060 Western Europe -1.836 -1.655 -1.729 -1.822 -1.440 -1.242 Asia -2.647* -2.365 -0.219* -2.147 -1.745 -10.070** Independent variables TMT nationality diversity 2.605 (1.636) -0.219 (4.381) 5.400 (3.815) -1.153 (2.651) 2.176 (2.837)
TMT nationality diversity (quadratic term) 3.928 (5.659)
Firm internationalization 2.178 (1.662)
Home region focus -3.377* (1.104)
Regional policy integration -4.187** (1.564)
Firm internationalization x TMT nationality diversity -5.556 (5.682)
Home region focus x TMT nationality diversity 3.903 (3.392)
Regional policy integration x TMT nationality diversity 0.631 (1.988)
Adjusted R2 0.161 0.167 0.165 0.166 0.196 0.186
F value 7.269** 6.720** 6.013** 5.569** 6.585** 6.220**
* p < 0.05; ** p < 0.01
Table 3b. Regression results (TMT regional diversity)
Dependent variable: average ROA Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
(n = 230) (n = 230) (n = 230) (n = 230) (n = 230) (n = 230) Control variables Firm size 1.505 1.481 1.474 1.193 1.371 1.377 Company age -0.011 -0.011 -0.011 -0.011 -0/010 -0.010 Industry Primary industry 5.288** 5.196** 5.126** 4.720** 5.352** 5.196** Secondary industry 3.387** 3.329** 3.348** 2.959** 2.592** 3.469** Region North America 1.516 1.805 1.794 2.141 1.921 -1.874 Western Europe -1.836 -1.824 -1.808 -1.797 -1.482 -1.533 Asia -2.647* -2.302 -2.354 -1.958 -1.658 -10.292** Independent variables TMT regional diversity 2.401 (2.297) 0.702 (7.047) 5.282 (4.589) 1.607 (4.108) -0.752 (3.801)
TMT regional diversity (quadratic term) 2.421 (9.498)
Firm internationalization 3.501 (2.385)
Home region focus -2.402 (1.598)
Regional policy integration -4.603* (1.900)
Firm internationalization x TMT regional diversity -6.914 (7.216)
Home region focus x TMT regional diversity -1.146 (4.786)
Regional policy integration x TMT regional diversity 2.028 (2.613)
Adjusted R2 0.161 0.161 0.158 0.162 0.190 0.177
F value 7.269** 6.500** 5.760** 5.435** 6.370** 5.936**
* p < 0.05; ** p < 0.01
Table 3c. Regression results (TMT internationalization)
Dependent variable: average ROA Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
(n = 230) (n = 230) (n = 230) (n = 230) (n = 230) (n = 230) Control variables Firm size 1.505 1.444 1.445 1.233 1.415 1.324 Company age -0.011 -0.011 -0.011 -0.012 -0.009 -0.010 Industry Primary industry 5.288** 5.251** 5.250** 4.954** 5.376** 5.165** Secondary industry 3.387** 3.297** 3.297** 3.036** 2.574** 3.440** Region North America 1.516 1.709 1.708 1.959 1.786 -1.875 Western Europe -1.836 -1.753 -1.754 -1.810 -1.483 -1.418 Asia -2.647* -2.383 -2.391 -2.138 -1.800 -10.000* Independent variables TMT internationalization 1.494 (1.848) 1.299 (4.893) 3.173 (7.247) -0.310 (2.654) 2.955 (3.526)
TMT internationalization (quadratic term) 0.308 (7.158)
Firm internationalization 2.144 (1.703)
Home region focus -2.578* (1.128)
Regional policy integration -3.970* (0.014)
Firm internationalization x TMT internationalization -3.629 (9.078)
Home region focus x TMT internationalization -1.488 (3.758)
Regional policy integration x TMT internationalization -0.775 (2.209)
Adjusted R2 0.161 0.160 0.156 0.158 0.190 0.178
F value 7.269** 6.432** 5.692** 5.295** 6.373** 5.950**
* p < 0.05; ** p < 0.01
DISCUSSION
Academic relevanceThis research project tried to gain additional insights as to how the core relationship works between TMT nationality diversity and firm performance.
As far as the sample was concerned this research made an effort to test this core relationship based on a comprehensive sample. The Fortune Global 500 granted a sample that covered 38 countries which was far more diverse than the sample of Nielsen and Nielsen (2013), who limited their scope to Swiss listed firms.
The findings of this research underline that the positive linear relation between TMT nationality diversity and firm performance was insignificant. Likewise no statistical evidence was found for the hypothesized curvilinear relationship. As mentioned above we have replicated the regression analysis for 4 other operationalizations of the dependent variable firm performance. In addition we also took into account another operationalization for the control variable measuring industry on a two-level basis (service vs. manufacturing). Finally we have also performed subsampling to examine whether there existed any difference between firms that were headquartered in either a developed or a developing country. Yet these additional regression models did not grant any significant insights. We can thus conclude that we were not able to statistically proof the likelihood of a curvilinear relationship nor were we able to confirm the findings of Nielsen and Nielsen (2013) that a nationally diverse TMT improves performance in a linear way. Note that this conclusion holds for all three operationalizations of TMT nationality diversity.
Even though ‘HRF’ is strongly tied to firm performance it did not have the expected modifying effect on the core relationship between TMT nationality diversity and firm performance.
Whether a firm makes its sales in the proximity of its headquarters or oversees does not matter for the relationship between TMT nationality diversity and firm performance, at least this effect is not strong. The same accounts for the effect of ‘regional policy integration’. A country’s membership in a trade agreement has a direct significant benefit for a firm that is headquartered in that particular country yet it does not significantly affect the relationship between TMT nationality diversity and firm performance. We can thus only underline that HRF and regional policy integration are significantly correlated to firm performance in a direct way (see model 5/6). All in all the hypothesized effect did not coincide with the statistical results both in terms of the direction and the magnitude of the effect.
Managerial implications
As for the managerial implications this research did not present any new insights besides addressing the significance of a nationally diverse TMT. This fact is not surprising while extant literature already provides abundant evidence for the pros of (TMT) diversity. Among others, Watson, Kumar, and Michaelsen (1993) state that nationality diversity contributes to a better performing firm where it can enhance the comprehensiveness and quality of strategic decision making which involves a certain degree of complexity, uncertainty, and lack of routine. The argument that too much diversity can have a negative affect on performance may be resolved through extensive training and development of personnel, in this case the TMT (Manix & Neale, 2005). Furthermore Zaheer and Mosakowski (1997) stress that the proverbial gap between the TMT and the environment, also known as the liability of foreignness, is of temporal nature. The firm performance we are looking at does not account for this temporal nature as it covers a
four-year period (2008-2012), in addition it would be advised to also study each four-year separately in order to better understand this logic.
Limitations and suggestions for future research
It is noteworthy to mention that Nielsen and Nielsen (2013) shed light on the limitation of the use of an individual’s nationality in predicting behaviour, which is not entirely ‘‘deterministic’’ (p. 380). Reason is that we exclude situations in which people have dual nationalities, hold nationalities of countries they did not grow up in, or are brought up by parents who’s nationality does not correspond to the nationality of the person in question etc. All these factors could well influence the validity of the use of the nationality attribute in predicting firm performance. As far as the dataset is concerned in this research, we solely had information on the regional background of TMT members, the number of nationalities represented in the TMT, and the number of international members of the TMT, therefore we computed the Blau index by using the regional background data instead of national background. Future researchers should try to obtain the country specific data of each and every TMT member and replicate the analysis to gain additional insights. Furthermore the actual sample size in this research was limited to 230 cases, which leaves 270 firms out of account. Future research should try to obtain more data to increase the usable sample size and therefore enhance the validity of the findings.
Lastly it would be interesting to compare the firm performance 2008-2012 to that of prior 2008. This will grant insights as to how the financial crisis could have had any influence on the performance of the firm. Furthermore by comparing the TMT nationality diversity prior the start of the financial crisis to that of during the crisis could provide additional evidence for, among others, Watson, Kumar, and Michaelsen’s (1993) argument to hold. They argue that (TMT)
nationality diversity contributes to a better performing firm where it can enhance the comprehensiveness and quality of strategic decision making at which a certain degree of complexity, uncertainty, and lack of routine is involved. The financial crisis is a good example of a context that is complex, uncertain, and definitely out of the ordinary (Crotty, 2009).
CONCLUSION
Diversity, in general, is characterized to contribute to the functioning of a group or team (Knight et. al, 1999). The literature assumes that diversity results in a richer variety of ideas, creativity, and innovation, hereby improving group performance (Cox, 1993). Nielsen and Nielsen (2013) attempted to re-examine the equivocal relationship between TMT diversity and firm performance and researched the direct effect of TMT nationality diversity on firm performance. At the heart of the relationship stands upper echelons theory, which describes that ‘‘executives’ experiences, values, and personalities greatly influence their interpretations of the (strategic) situations they face and, in turn, affect their choices.’’ (Hambrick, 2007: 334). Despite Nielsen and Nielsen’s (2013) linear relational findings, our research argues that the extant literature provides convincing evidence suggesting a non-linear relationship (Nielsen, 2010; Schmid & Dauth, 2014). Furthermore group process theory provides another source of evidence of the harmful effect of too much (TMT) diversity. Mannix and Neale (2005) argue that group diversity leads to ‘‘social divisions that, in turn, create poor social integration and cohesion, resulting in negative outcomes for the group’’ (p. 34). Despite the theoretical evidence, the empirical evidence did not confirm our theory development and could not confirm the curvilinear relationship between
TMT nationality diversity and firm performance. In fact, nationality diversity did not grant any significant correlation, linear nor curvilinear.
While these findings can be considered to be at least somewhat disappointing, future research shall benefit by replicating our research, on the condition that a more complete dataset is gathered and a larger sample is used. Hereupon more valid conclusions can be drawn on the shape and size of the hypothesized effect of TMT nationality diversity on firm performance.
ACKNOWLEDGEMENTS
This research project resembles the final ‘curtain call’ of my academic career. Without the guidance and meaningful feedback sessions with my supervisor this MSc thesis would not be even close to what it has become. Therefore I would sincerely like to thank Dr. Pisani, Assistant Professor of International Management at the University of Amsterdam, for his time and patience.
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